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    India Inc sees rate hikes curbing inflation; some wary of impact on growth

    Synopsis

    “If you look at the Indian economy, it is better placed on inflation than some of the major economies like the United States and Europe. We have seen RBI quickly raising rates, there have been curbs on exports; action taken to reduce taxes on fuel. All these things will help rein in inflation,” said Anish Shah, managing director of Mahindra & Mahindra.

    inflationAgencies
    The Reserve Bank of India’s move to hike the repo rate by another 50 basis points will cool stubbornly high inflation and support the rupee, top industry executives said.

    The move may, however, hit consumption, and thus growth, with demand already under pressure, some executives cautioned.

    “If you look at the Indian economy, it is better placed on inflation than some of the major economies like the United States and Europe. We have seen RBI quickly raising rates, there have been curbs on exports; action taken to reduce taxes on fuel. All these things will help rein in inflation,” said Anish Shah, managing director of Mahindra & Mahindra.

    It is more important to keep inflation in check at this point, he added.

    The central bank raised the repurchase rate, the rate at which it lends to banks, to the pre-pandemic August 2019 level of 5.40%.

    India’s retail inflation for June inched down in June to 7.01% from 7.04% in the previous month, but it remained above the 7% mark for the third successive month and above RBI’s 2-6% tolerance level for a sixth straight month.

    “…50 bps (hike) has become the new normal and a large number of central banks are now hiking by 75- to 100 bps…in RBI, we take a very calibrated and measured view. We factor in the impact of the rate action on the aspect of growth and on our consumer urban and rural demand,” RBI governor Shaktikanta Das said on Friday.

    The banking regulator retained its GDP growth projection at 7.2% for the ongoing fiscal year ending March 31, 2023 and maintained the inflation outlook at 6.7%.

    Dabur chief executive Mohit Malhotra said the rate hike will help tame inflation and drive foreign direct investment (FDI) into India, strengthening the rupee against the US dollar. But “it can negatively impact demand and consumption”.

    Agencies like the World Bank have flagged rising inflation, supply chain disruptions, and geopolitical tensions as among risks to India’s economic recovery.

    Snehdeep Bohra, director at Fitch Ratings, said the rate increase may hurt demand for cement from the housing sector, which accounts for almost two-thirds of the cement consumption in India.

    “Urban housing is particularly sensitive to interest rate hikes,” he said. The urban housing segment accounts for around 30% of total cement consumption in India.

    Major real estate players such as Puravankara Ltd and Brigade Enterprises Ltd, however, downplayed the impact.

    They said with pent-up demand for housing post-Covid-19 and a steady job market, demand momentum is expected to continue in the residential housing segment, especially in the top six cities, where office leasing and absorption has been strong.

    “Against the backdrop of rising income and employment levels and buoyant customer sentiment, this spike in rates is unlikely to affect residential sales,” said Abhishek Kapoor, chief executive of Puravankara.

    Atul Goyal, the chief financial officer of Brigade Enterprises, added that the increase in the repo rate was expected.

    “We feel that it will have only a marginal effect on the real estate sector. While this would mean an increase in interest rates for housing loans, the demand that the sector is currently witnessing is expected to remain the same,” he said.

    Despite the current global macro challenges, industry executives said the economic fundamentals of the country remained intact.

    “Our country has the benefit of several systemic growth drivers like its demographic dividend, rapid digitization and an increasing ease of manufacturing and doing business…We believe that these themes will continue to play out irrespective of time frame, and create a sustained growth momentum for the economy,” said Vivek Gambhir, CEO, Imagine Marketing, which makes premium boAt gadgets.


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